Scolding from Chinese state media dampens Apple's earnings cheer

BEIJING (Reuters) - Apple Inc (AAPL.O) may have just notched up its fourth straight quarter of double-digit revenue growth in China, but among some Chinese consumers the glow was overshadowed by Chinese state media’s tirade of criticism against the smartphone giant.

On Tuesday evening in China, hours before Apple’s earnings, China’s official state broadcaster railed against the firm in a 30-minute special report, accusing it of allowing illegal content, including gambling apps, onto its platform.

The program was one of at least five reports by state media that targeted the company in the past week.

Although Beijing has criticized Apple before, the attacks highlight an increasingly fraught balancing act for the firm in the world’s biggest smartphone market, where trade friction, tighter regulations and fierce competition threaten robust consumer appetite for its iPhones and other products.

Mo Jia, an analyst at industry tracker Canalys, said the reports needed to be seen as part of the U.S.-China trade conflict, noting tensions over a U.S. ban imposed on telecommunications equipment maker ZTE Corp (0763.HK) (000063.SZ) that has yet to be lifted.

“The Chinese government is maybe trying to warn the U.S. government in a similar way by saying, your tech firm in China is not that safe either,” he said.

The Trump administration has upped the ante in its trade war with Beijing - considering a 25 percent tariff on $200 billion worth of Chinese goods. That prompted China on Wednesday to say “blackmail” wouldn’t work and to threaten to hit back.

The criticism of Apple also comes ahead of a new campaign by the country’s regulators to clean up spam and unsolicited calls, which are a pervasive issue in China where phone numbers are often sold on black markets.

The 18-month campaign was announced on Monday and starts in July. Apple has been specifically mentioned in some reports about such problems.

“Major communication operators in China have little ability to prevent such spam messages, since (Apple) says it has no right to monitor user messages out of privacy concerns,” the People’s Daily said last week.

Apple declined to comment on the state media reports while a fax to the Chinese internet regulator requesting comment did not receive a response.

BIG SPENDERS

Like its performance in other regions, much of the 19 percent revenue growth in China for the last quarter was led by the price hike for the iPhone X. It retails for 9,605 yuan ($1,415) in China - a price tag that doesn’t appear to be fazing the Chinese smartphone consumer.

Apple’s efforts to alter the iPhone X’s appearance and new features such as facial recognition have gone down well - a contrast to the iPhone 7 which had a less substantive upgrade and led to a sharp China sales decline in 2016 for the firm.

“I had to buy the X, not even the 8, because it has a better camera, a larger screen, and also for the face recognition,” said an 18-year-old college student who gave her first name as Feifei.

But the question of brand loyalty always looms large in China, particularly at a time when state media has stepped up its criticism.

“Chances are I may have to shift to a domestic smartphone to support Chinese companies,” said Michelle Huang, a 23-year old bank worker in Beijing who owns an iPhone and is thinking of getting a new phone.

Competition in China has also gotten tougher. Huawei Technologies [HWT.UL] overtook Apple to become the world’s second-biggest smartphone seller in the June quarter, data from market research firms showed, as it expanded its lead back home.

Canalys’ Jia said, however, that he did not see too much of an immediate threat to Apple from the state media reports.

“Apple’s fan base is quite stable in China and they are premium users so they not so easily swayed by the government and the news,” he said.

In a quick Reuters survey of 24 smartphone users on the streets of Beijing on Wednesday, 17 had heard of the state media reports. Eleven said Apple’s efforts to protect consumers were sufficient while six said they believed the company should increase its efforts to vet content.

Under pressure from China, Apple has bowed before. Last year it removed over a thousand apps from its app store on request from regulators, who called on all app store providers to purge unsanctioned news, messaging and other apps that would allow users to access foreign websites.

It also began migrating Chinese iCloud accounts to local servers under new laws that require it to hand over the reins to a partner firm that is overseen by a government work group.

The resulting Apple experience for Chinese iPhone users has become highly localized in the past year, with less crossover between apps and features in foreign markets.

The concessions have allowed Apple to keep its core services, unlike Facebook Inc (FB.O) and Alphabet Inc’s Google (GOOGL.O) which have been relegated to the edges of China’s consumer market following battles with regulators.

(This story has been refiled to correct timing of Chinese state media reports in paragraphs one and two.)